'Bulletproof' credit about to be shot down says top bond manager

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The risk-off environment that has seen equity markets fall will soon hit credit and riskier markets, said Schroder's James Barrineau who has recently reduced his local currency and corporate debt exposure.

Uncertainty about the US fiscal cliff coupled with a desire for fixed income managers to preserve this year's gains will likely lead to a sell-off of riskier assets before the end of the year, said Barrineau, co-head of emerging market debt and who manages the  Schroder ISF Emerging Market BondSchroder ISF Emerging Market Corporate Bond and Schroder ISF Emerging Market Sovereign Bond funds.

'Equities have so far declined whilst credit markets have been bulletproof this year,' said Barrineau on Friday.

'Over the last couple of days we've started to see a cautious sentiment effect corporates. It's time to act decisively now.'

Since the end of October Barrineau has built a 10% cash buffer through the sale of mostly local currency and some corporate exposure.

Barrineau yesterday sold corporate debt following his reduction of investment grade corporates in Brazil and Latin America over the last few weeks.

Out before Christmas

Emerging market currencies perform with comapritively high volatility in uncertain markets comapred with other riskier assets. Ahead of the strained political environment in the US over it deficit, Barrineau said he expects market volatility to continue for the rest of 2012.

'There's also a bit of game theory involved. It's been a tremendous year and managers will want to sell out now in order not to lose the last 11 months of returns,' said Barrineau, who joined Schroders earlier this year from the US boutique Ice Canyon to run the three funds launched in July.

'The US fiscal cliff will get fixed. It's just that coupled with markets having such a good run, it's best to get out of the way of volatility before Christmas.'

Inflation hedge

Barrineau said he is also looking to extend duration on Mexican government bonds as well as other investment grade emerging market sovereigns with a view to minimising interest rate risk on emerging market bonds that are more correlated to treasuries.

In credit, Barrineau holds two-year Venezuelan government bonds as well as short duration Russian non-investment grade quasi-government and corporate bonds.